Transformative industrial policy in Europe through a Schumpeterian “looking glass”: Capitalism, sustainability and democracy? 

Published on June 30th, 2023

The current industrial transformation towards green energy-based sectors raises, particularly in Europe, major structural challenges. They involve not just systemic transformations of industrial production and supply chains with heavy investments in new, green energy production sites and new, renewable energy grids, but also a possible relocation of industries to more easily accessible renewable green energy sources. At the same time, the (re-)use of existing materials is also reflected in more revolutionary, rather than incremental, applications of circular economy principles with, as a result, more radical shifts in the reliance on local suppliers as opposed to the well-established global value chains. A similar transformation is likely to take place in the agricultural sector. 

In short, Europe is likely to be confronted with an industrial structural transformation process with major relocation implications across Europe. This is a transformation the European Commission (EC) is trying to orchestrate from a European perspective, but which individual European Member States are implementing with their own industrial policy interests in mind. We think it is time to look at such transformative industrial policy not so much through a national looking glass as through what we call here the “Schumpeterian” looking glass.  

Joseph Schumpeter lived in turbulent times. He witnessed of course the devastating effects of the First and Second World War which led to the falling apart in Europe of empires and nations’ identities.[1] He was, at a personal level, directly confronted with the great depression and observed, above all, as no other economic historian, the impact of the “industrial” revolution. This was a period of dramatic change in which the long-lasting political, economic, and social effects of the industrial revolution became visible, often in revolutionary and short-term destructive ways, ultimately resulting in a long-term transformation of our industrial and societal systems. 

Today, it could be said that we live in similarly turbulent times. Politically we see rising geo-political tensions reflecting a new multilateral political order in which Europe, the US, and China have embarked on a global competition for high-tech dominance and access to essential mineral resources. Economically, with the unsustainable development path of capitalism resulting in out-of-control climate change and declining biodiversity, we see hard boundaries on further industrial growth and material consumption. And finally, technologically, we see the emergence across the board of Artificial Intelligence enabling machine learning on a scale previously unknown to humanity. In short, this is a world which resembles in many ways the world Schumpeter faced in his early life.  

Times of turbulence require transformative policies across various policy areas. The expansionary and rather linear growth and development framework assumed to govern business and industrial growth is today being questioned in similar ways to the Schumpeterian period of the late 19th Century. This has been well encapsulated in Schumpeter’s famous quote, which reads: “add as many mail-coaches as you please, you will never get a railroad by doing so”.[2] Since its post-war creation, the European Community, and later the Union, became internationally specialized in energy-intensive industrial processes, from the production of iron and steel to the manufacture of motor cars and machine equipment. The enlargement in the 1990’s further widenedthese European industrial value chains across the EU towards the South and East.  

The EC has, in response to these challenges and the new environmental crisis, positioned itself with a new industrial policy guided by the new principle of “open strategic autonomy.” While we welcome such a shift towards a more transformative industrial policy, we also warn against the risks of falling back into an already-tested, nationalistic industrial policy framework where public policy is primarily steered by the interests of incumbent firms reluctant to structural change.  

An important starting point, so far broadly ignored in the European industrial policy debate, is the fact that these transformations will hit places differently. The energy transition from fossil to renewable energy, the systemic transformation of key industry sectors in the EU, including industrial agriculture and in particular live-stock farming, the circular economy principles and the subsequent shifting demands for land use, housing, mobility, public transport, will create plenty of new sustainable development opportunities. However, they will also create pressures to reallocate industries and value chains, putting other territories under stress whose populations are ageing or emigrating, and forced as it were to adjust to a rapidly changing external environment in which the individual has little say. The territorial effects of accelerating climate change and declining biodiversity will trigger additional stress, and several territories already now suffering from water scarcity, wildfires, loss of biodiversity or flooding will see things worsen.  

To summarize, any industrial policy addressing Europe’s green energy transformation will have to consider more fully the relocation implications of such transformation. It will have to take a Schumpeterian place-based approach to industrial policy involving “creative destruction” opportunities and threats across different territories in Europe.  

As Europe expands its financial tools and means, through for example The European Green Deal, the NextGenerationEU, the Just Transition Fund, and the Green Deal Industrial Plan, to assist territories, regions and places to transform, it will increasingly have to admit that it is first and foremost a union of places rather than of nations. Creative solutions cannot be restricted by borders. The role and importance of proximity in the new circular economy principles will highlight the role of local suppliers, of neighborhood, and, in short, the central role of territories. The required changes imply in other words many more structural transformations, both sectoral and geographical, in what could be called, with a wink at Schumpeter, “Capitalism, Sustainability and Democracy”.[3] 

With the roll-out of new green-digital infrastructure, there is a need to add ‘creative reallocation’ to the European policy toolbox, requiring in turn new and bold public policy. In today’s fierce competitive landscape, the winners will be those who combine place-based approaches, cross-border alliances and an open spirit.

A more extensive version of this article is available as a UNU-MERIT Working Paper 2023-022

[1] Schumpeter’s own birth city Triesch (or Třešť) in Moravia changed several times over his life in national identity.

[2] Schumpeter, J. A. (1935), “The Analysis of Economic Change,” Review of Economic Statistics, vol. 17, May, p. 4.

[3] Schumpeter J. A. (1942) Capitalism, Socialism and Democracy, first published January 1st, 1942, Routledge 1976.